What is interest typically defined as?

Interest is typically defined as a fee paid by a borrower to the lender. This fee compensates the lender for the risk and opportunity cost of lending the money. When someone borrows money, they are able to use those funds immediately but must pay back the original amount borrowed (the principal) along with additional funds known as interest. This interest represents the cost of borrowing and is usually expressed as a percentage of the principal over a specified period. Understanding this concept is essential for managing loans, credits, and various financial products effectively. It also highlights the importance of knowing how interest rates can affect overall borrowing costs and financial planning.

The other options, while related to finance, do not define interest. The principal amount borrowed is the actual sum that the borrower receives and must pay back, but it does not encompass the concept of interest. A type of debt refers to obligations that require repayment but does not detail the cost of borrowing money. An overall financial literacy score measures one's understanding of financial concepts but is unrelated to the specific definition of interest.